What is Forex?

The Foreign Exchange (FOREX) market is by far the largest market in the world. The $4 trillion average daily turnover dwarfs the daily turnover of the American stock and bond markets combined.

There are many reasons for the popularity of foreign exchange trading, but among the most important are:

  1. The available margin trading
  2. The 24-hour a day 5 days a week liquidity
  3. And low if any commissions.

Of course many commercial organizations are participating purely due to the currency exposures created by their financial institutions accounts on their import and export activities.

Investing in foreign exchange remains predominantly a domain of the big professional players in the market such as hedge funds, banks and brokers.

Nevertheless, any investor with the necessary knowledge is and complete understanding of this market can benefit from this exciting arena.

What is Currency Trading

Currency trading is done, when a trade off is made against the strength and weakness of two or more opposing currencies. For example the currency trading of the Euro against the US dollar or that of the Japanese Yen.

In order for a Forex trader to be successful in currency trading, he needs to look at the market trends and try to analyse where and in what direction he might think that the market is going to go.

There are many factors which can (and do) contribute to the daily currency trades being made, and these can have almost immediate effects to the currency trader. In the world of online forex  trading such factors could be:

  • The outbreak of war
  • Natural (sometimes called Acts of God, in insurance terminology) disasters such as hurricanes, earthquakes, typhoons
  • Secessions and the breaking of trade blocs as recently witnessed with Britain’s exit from the Euro bloc (Brexit)

All these factors impact directly on the supply and demand of currencies and commodities. For example, war could interfere with the supply and delivery of crude oil. Terror acts also play a role in currency trading. Although, traders today, and after 9/11 tend to take such things more in their stride now, and the currency trading markets usually correct themselves pretty quickly today.

In internet forex trading, an exchange rate represents the value of one currency against that of another. An exchange rate fluctuates over time.

The US dollar is the most traded currency in the world and we can look at the value relative to a third currency, which may be obtained by dividing the US dollar rate for that of another.

For example, if there a 120 Japanese yen to the dollar and 1.2 euros to the dollar, then the number of yen per Euro is 120/1.2 = 100.

The magnitude of numbers is not, by themselves, indicative of the strengths or weaknesses of any particular currency. Meaning that the US dollar could be rebased tomorrow, so that one new dollar was worth one hundred old dollars.

All the numbers, in the table, would be multiplied by one hundred – this does not suggest, however, that all the world’s currencies just got weaker. One way or another, currency trading is almost as old as mankind itself.

What is Margin Trading?

Foreign exchange trading is normally undertaken on the basis of margin trading or gearing.

A relatively small deposit is required in order to control much larger positions in the market. This is possible because when you buy one currency you sell another.

Margin requirements are set by your broker and vary from as little as 1% to 10% margin.

This means that in order to trade 1,000,000 USD on 1 % margin, you need to place just 10,000 USD by way of security.

That same security of 10,000 USD, traded on a 10% margin could control up to 100,000 USD worth of one currency against another currency.

Master your Mind, Develop the Perfect Trading Discipline

Every successful forex trader needs a set of skills and characteristics. Some of these skills we can acquire through training while others we can only develop from constant practice, which is why a demo account comes handy.

The ability to understand the fundamentals of a currency and the ability to point the direction of the trend, for instance, are some of the key skills that online forex trading demands, but none of them is as important as developing the proper trading psychology and discipline.

What’s it About Trading Discipline That is so Important?

If you ask me, or any other sober forex trader in Kenya, they will tell you that the psychological aspect of trading is the most important and defining part of trading. Forget about a fancy trading system or a million-dollar forex trading course, if your psychological game is not intact, you are headed for doom.

A s a forex trader you will always be entering and exiting trades, sometimes on very short notice. The market will constantly force you to make snap decisions. To operate profitably in such circumstances, you will need an incredible mental game, and by extension, discipline, so that you are able to stick to your plan.

This is what we call self-discipline.

According to Mark Douglas, the author of Trading in the Zone, self-discipline is “a mental technique to redirect our focus of attention to the object of our goal or desire, when that goal or desire conflicts with some other component of our mental environment.”

In short, self-discipline is the ability to develop a mental framework that lets you stay focused and motivated in spite of challenges, losses, mistakes, and conflicts of interest. Particularly, you will need to teach yourself how to get rid of the negative feeling that is associated with losses and setbacks.

Unfortunately, this is easier said than done. When faced by the real market risk, many traders abandon their trading plans and succumb to emotional trading. Greed, fear and euphoria can get the best of you and ruin your plans.

Things would have been different if self-discipline was a trait that you were born with. Unfortunately, it is not.

Many traders find it difficult to develop steady forex trading discipline, which is why automated forex trading software has become so common. But trust me, it is possible to develop the right trading discipline. Being disciplined will help you become a more profitable trader in the long run, even if you decide to use automated trading software in the future.

Here is how you can build your trading discipline:

Developing Clear Trading Goals

Setting clear trading goals and understanding the motivation behind your trading is a good place to begin. Ask yourself, “Why do I want to trade forex? What do I want to gain and achieve from investing in the forex market?”

Sitting in front of your computer, taking trades and hoping for the best is not enough. You must have a target in mind. What are you aiming to achieve by taking that particular trade? How many pips do you hope to gain?

Many beginner forex traders get into trading because they feel it is a get-rich channel. They set unrealistic goals and pay a hefty price for that. Don’t just set a bunch of crappy goals because I told you to do so. Your goals need to be realistic. It is important that you set challenging but achievable goals to avoid frustrations that may result from not hitting your target.

Without a goal in mind, it is possible to let the discouragement of being new to trading defeat your desire to learn.

Here is something that you must keep in mind as you venture into forex trading; every endeavor that you set to undertake will always be difficult in the beginning. This hold true more in online forex trading. Chances are that you will suffer many losses. This part will be disheartening, and if you are not disciplined, chances are that you will give up trading.

Maintaining Focus on What Needs to Be Done

Setting clear and realistic goals puts you one step closer to becoming a successful and disciplined forex trader. It is easier to stay focused on your goals, but that assumes that you actually get off your ass and do what needs to be done i.e. trading. For instance, if your goal is to let profits run and cutting your losses short, you must start putting trailing stops to your trades.

On the contrary, if you did not set clear trading goals, you’ll probably waste a lot of time trying to figure out what needs to be done. In return, this makes you more susceptible to your emotions.

Keeping a Trading Journal

Keeping a trading journal is an easy way to track your past trades. It can also help you identify areas that you need to work on. I also find that a trading journal helps me avoid making impromptu trades since I hold myself accountable for every trade that I take.

After a streak of losses, many traders, I included, start to take trades that are not in their plan. By recording your trades in a journal, you will identify this behavior and work to correct it.

A trading journal is also a great way to keep yourself motivated. It is unavoidable that you will face a lot of obstacles along the way. There will be a lot of times when you will feel discouraged and ready to give up. This is where your self-discipline will be put to the test. In order to succeed, your resolve to push on must be greater than the temptation to give up.

When you have reached your trading goals, take some time to refer back to your trading journal. What were the trades that you took that led to your target. What kind of analysis led you to hit your target? Can you replicate it on your future trades?

Are these 3 Demons Haunting Your Forex Trading Strategies?

You want to be a successful forex trader. You want to retire from your 9-5 job and enjoy working from anywhere in the world. You want to spend more time with your family, and you want to provide your loved ones with the kind of lifestyle that they deserve.

Trust me. All this is possible when you invest in the forex market.

However, success in online forex trading, like all other good things, does not come on a silver platter. You have to work for it. You have to condition yourself for success. You have to change some habits, and adopt other habits of successful forex traders, and you have to open your eyes to what is really happening in the market.

What Limits Your Success as a Forex Trader?

A lot of forex traders in Kenya believe that they need an exceptional trading strategy or advanced education in finance and related fields to be successful in forex trading. Nothing could be further from the truth.

Good academicians do not always make good forex traders and people who develop incredible trading systems do not always end up profitable. Long-Term Capital Management (LTCM), a hedge fund management firm that was based in Greenwich, is a good example of how good academicians do not make the best forex traders.

LTCM’s board of directors included Rober C. Merton and Myron Scholes, two Nobel Prize winners whose contributions to the economic theory are among the most valuable in our century. Nonetheless, their articulate analytical skills and spectacular knowledge of the markets did not prevent the collapse of the firm in 1998.

It is clear that lack of trading knowledge was not the cause of collapse for the most reputed hedge fund firm in Wall Street. Instead, it was the 3 demons that finally got up with them and razed their firm to the ground.

These 3 demons, if not tamed, will also be the cause of your losses.

What am I Talking About?

Emotions.

If you trace the source of failure for every trader, beginner, intermediate and pro alike, you will realize that their failure is not caused by lack of understanding of the market. Majority of the failure in forex trading is rooted in emotions.

There are particularly 3 strong emotions, which is not tamed and handle cause the fall of many a trader.

Greed

The greed demon has to be the most tempting among traders. The demon has a long and luscious tongue that constantly whispers to you that unless you do act now, you will miss the most profitable trading opportunities in the market.

The greed demon is always on its feet. Like it is high on something. It is always urging you to enter into trades faster. It will cause you to lose focus as you rush to make trades that have not been carefully analyzed. You have to recognize this demon for what it is. It is an emancipated and empty-bellied demon since none of its exhortations for speed and greed lead to profits.

Every trader has a natural inclination to want to make money. Every trader attaches great importance to financial success. I wouldn’t be trading if I was not profit-oriented. In fact, no trader would withstand the pressure of the market if they were not driven by the desire to make money. The drive to make money, in moderate proportions, is healthy and a requisite driving force for traders.

The drive to make money, however, becomes unhealthy when it becomes the main driving force of your trading decisions; when it starts interfering with your trading decisions and trading strategies. Only logic should dictate your decisions in the market.

So, how do you strangle the Greed Demon and ensure you are making the right trading decisions?

The first step to strangling the greed demon is to ensure that you have developed a disciplined approach to trading. This will reduce the impact of impulse decision in your trading.

By developing a trading system and strictly following it from the very start, we can ensure that greed has no play in our trading decisions. You will be able to make your decisions based on a tested and proven trading setup.

Emotions can only thrive where fear and uncertainty are in plenty. To prevent fear and uncertainty, you need to make sure that you have developed, backtested and taken your trading system on a roller-coaster ride on a demo trading account.

Also, keep in mind that your desire, motivation and quench for profits will not actually make you achieve profits. There is nothing to be achieved by bowing down to the demon of greed.

Fear

You will recognize this demon by its sharp and shrieking voice that is always shouting to us of imminent dangers ahead. The demon injects second-thoughts and doubts on whatever trades you want to take.

The Fear Demon has the opposite role to that of greed. Instead of pushing us to trade like automation weapons, opening and closing positions with the speed of lightning, fear does the complete opposite. It tries to convince us that we cannot trade profitably, regardless of the meticulousness of our trading systems and the thoroughness of our analyses.

If they overcome fear long enough to get into trades, fearful traders will not wait for their positions to realize profits. They close positions prematurely, and end up making massive losses from drawdowns, commissions and broker spreads.

Apart from not taking trades and closing positions prematurely, fear also leads to more irrational decisions.

When dealing with fear, it is important that you realize the distinction between fear and conservative trading. A conservative approach to forex trading is usually a recipe for success. A conservative forex trader will be skeptical of all information he gets, but that does not stop him or her from taking action when his/her trading system shows that a profitable trade setup in in play. A fearful trader on the other hand is not only incredulous about the opinions of others but also about everything that his trading system tells him. He is always confused of what to do, where to look, and which trade to setup to take and which one to avoid.

A fearful trader does not trust anyone, not even himself or his trading system. He cannot evaluate the markets effectively as he has a gnawing mistrust of all trade analysis tools. The trader always ends up trading in a style akin to casino gambling; the outcome is always disastrous long term losses.

How can you strangle the demon of fear?

To avoid the calamitous results of fear, you must train yourself to realize that no trader ever became successful through randomness. You must be convinced that you are in full control of your choices. You must have a clear trading system that you adhere to until it proves that it is no longer profitable. All this is possible when you have a logical and sober approach to trading, something that can only be achieved through patient and persistent study of the forex market.

Another way to strangle the demon of fear is to avoid overleveraging your account and having a tight risk management strategy, such that a losing trade would not wipe out your whole account.

Euphoria

Euphoria is the queen of all forex trading demons. It promises infinite wealth in a limited amount of time.

Don’t be fooled.

Euphoria can only deliver destruction, disappointments, and destitution.

Euphoria works hard to ensure that you only see the rosy side of investing in online forex trading. It makes you think that you have somehow been blessed with the Midas Touch. It makes you think that everything you touch will turn into gold.

Most traders will least be affected by euphoria because many are aware that being successful in forex trading is no child play. While it is possible to make huge profits in a short time, such results are usually the result of many hours poured in studying forex and practicing trading on a demo account.

In case of many forex beginners who do not have background study or practice, euphoria usually results in despicable results. Beginners usually develop euphoria after a string of profitable trade setups that make the trader believe that all is rosy in the markets. As the trader gets comfortable, his analysis slackens, he takes larger unmitigated loses, and this is when the demon decides to strike.

The key to vanquishing this demon is to realize that no analysis or trading system is error-proof. A successful forex trader is always skeptical of his systems, although this does not stop him from taking trades as he bases all his decisions on logic alone. The successful trader realizes that the success of previous trades is not an indicator of profiting in future trades.

A successful forex trader does not get excited about his past performance. The next trades may or may not be successful depending on how diligently he has studied the market. Thus, the best way of killing euphoria is realizing that the success or failure of previous trades does not impact the outcome of the next trades. The success of every trade is only Dependant on how carefully you have studied and analyzed the market prior to opening a position.

Conclusion

The problems I have analyzed above are associated with trading psychology. In order to perfect your trading psychology, you must work to reduce the role of emotions in your trading decisions. You must understand that your success or failure is not a matter of luck, but a consequence of the choices that you make.

I have always pointed out that it is hard to get an unleveraged account wiped out from a single trade. If you lose all your money from a series of trades, then it is clear that luck has no role to play in that.

The best way to deal with the emotions that are associated with online forex trading is to develop a logical approach to trading. Study the market and understand its mechanisms. Understand the forces that drive price. In this website, I strive to equip you with the basic understanding of these factors and some more. To never miss any of the informative news, consider signing up for my newsletter.

 

3 Strategies To Overcome the Fear of Success When Trading Forex

Is there anything like the fear of success? I know you are thinking that I am kidding or I am being sarcastic. No. I am not.

The fear of success is as real as the fear of failure. Never felt it? Count yourself among the few lucky forex traders in Kenya.

The fear of success is, in fact, more calamitous than the fear of failure because a lot of traders do not know that it exists.

We all say that we want to be successful. We want to make enough money to give our families the kind of lifestyle that they deserve, but subconsciously, we are freaking afraid of all the changes that come with success.

You see, success comes with new and higher expectations. I compare it to a soccer player who scores the most goals and skyrockets to become the top player in that football season. The chances are that the player will set his goals higher during the next season. He will want to score more goals and surpass what he scored the previous season.

And therein lies the problem.

The Pressure of Success

For a lot of people, the pressure that results from a one-time splendid performance may keep them from even trying.

In our case, the soccer player may be afraid that if he tries, he will fall short of how he performed in his excelling football season. He’d rather remain on the sidelines than try and make a fool of himself.

Have you ever felt something closer to this?

This situation is not uncommon. After all, a lot of us grew up being grilled about the importance of excelling in whatever we do.

This pressure to excel makes online forex trading more difficult because no matter how much you try to become better, you cannot avoid making losses. They are part and parcel of trading. You can’t win in all your trades.

Mostly, the fear of success in forex stems from being anxious that you could be on the wrong side of a trade setup.

Many traders identify an incredible entry signal. The pips are just right, and if the trade goes their way, they would walk away with a tidy profit, but the fear of success holds them back.

A few hours later, they are beating themselves up as they would indeed have walked away with a tidy sum of profit.

What can you do to banish the fear of success once and for all? Here are 7 tips:

i.             Focus on the process not the profits

The problem with many forex traders in Kenya (and around the world) is that they focus so much on the profits they stand to gain. If they lose on a trade, their confidence is instantly shattered. The one-time loss keeps them from jumping in on entry signals that they would normally take.

One plausible solution to this is to put the profits and losses out of your mind and focus only on your trading strategy. By doing this, you not only take away the pressure to perform but also get to understand what can be done to improve your forex trading strategy.

ii.           Have an open mind

The behavior of the forex market is constantly changing, which means that you also need to constantly change your trading strategies.

The problem with many forex traders is that they believe that they have to be right; that their strategies are right. They do not want to admit that they were wrong. They are afraid that the market will make them appear foolish.

To overcome this fear, you need to let of your need to always be correct. This will relieve you of the pressure of wanting to be right all the time. It will free your mind to concentrate on and better understand what is happening in the forex market at that particular moment.

iii.         Set realistic trading goals

Goals in forex trading help you bridge the gap between your hopes and reality. If you set unrealistic goals, you set yourself up for a tirade of disappointments. The disappointments affect your mental state and impair your decision making capabilities.

By setting realistic trading goals, you begin to see how far you are from achieving them. You get to a clear mental picture of what it will take to achieve your goals. If they seem far-fetched, you can always cut back on your expectations.

The Power of Beliefs and How They Affect Your Forex Trading Strategies and Outcomes

Trading in the short-term is more profitable that trading in the long term.

You can only predict the market correctly in the long term.

The stochastics is oversold so the market is bound to go downwards.

Forex trading is difficult.

Forex trading is easy.

Online forex trading is lucrative and worth every single shot.

Technical analysis is the best way to figure out the markets.

What do all the above statements have in common?

All of them are beliefs about the forex market. All of them shape what we call the trading psychology of the person who holds the belief.

Can you identify any belief that you subscribe to from the ones listed here?

I will let you into a secret about any kind of belief.

Beliefs are hard and painful to let go. Some of our beliefs are formed from traumatic experience that we’ve had. These beliefs and perceptions may not be necessarily bad, but how do they affect your forex trading career.

Online Forex Trading is all Beliefs

Online forex trading allows you maximum freedom to do as you wish.

There is no teacher to cajole you from taking a certain trade.

You have the freedom to decide which trading session you will use to place your trades.

You decide the currency pairs that you will trade, and

You choose the maximum or minimum lot size you will trade

So, if the forex market accords you all this freedom, what dictates your trading decisions?

The simple answer lies in beliefs.

You may think that your forex trading decisions are determined by a piece of news or a movement of a technical indicator on the charts, but it is not. It is your basest belief about the news or the technical indicator that influences you to make whichever trading decision that you make.

You can trace back the path to every trading decision you have ever made on your beliefs.

For instance, why do you prefer to trade a certain currency pair and not another one?

Or why do you use the particular trade setup that you use?

If you trace back the answer to the above questions, you will be shocked to realize that these decisions emanate from a strongly held belief.

Becoming aware of the beliefs that shape your trading decisions is the first powerful weapon you have in your trading arsenal.

What are your beliefs about online forex trading?

Let us do something practical here. Take a pen and paper and see if you can list at least 7 trading decisions that you have.

Here are mine:

  • I must always trade using a predetermined trade plan
  • Forex trading is as risky as any other investment you decide to make
  • I must have a risk/reward ratio charted out before I place any trade, and this must always be 3:1
  • Support and resistance levels are extremely crucial when it comes to predicting and analyzing the market
  • Trading the forex market is all about beliefs!
  • And these are not all…

Looking at the above, I can already see how each one of these beliefs shape my trading decisions. Can you see the same when you look at your 7 beliefs?

Where Do Your Beliefs Stem From?

I have already mentioned that most beliefs are formed after going through a traumatic encounter, but this is not the only source of your beliefs.

  1. Nature/Evolutionary

At the most basic level, beliefs are evolutionary. They are programmed into us as part of fight or flight that has evolved for over thousands of years. Beliefs, just like emotions, are hardwired into our DNA, our very fabric that makes us human.

  1. Environment

Most of your other beliefs are a byproduct of your upbringing. Would you have different beliefs if you grew up in the USA’s city of New York as opposed to some estate in Kenya? Definitely Yes.

  1. Indoctrination

Other beliefs are indoctrinated into us. To a certain degree, a lot of people (apart from the truly enlightened) accept commonly held beliefs. As we grow up, our subconscious collects, accepts and stores a set of beliefs without questioning them.

  1. Identity beliefs

Some beliefs are as a result of whom we believe ourselves to be. “I am technical trader” is an example of an identity belief.

Are Your Beliefs About the Forex Market Useful?

“We trade our beliefs about the market”~ Van K. Tharp

There are a lot of different approaches to the market as there are traders. This is because every trader has a different beliefs about the market.

In a nutshell, we all see what we want to see.

The good news is that we get to choose our own beliefs. No one can impose a belief on us. And this is where the real power of beliefs about the FX market is realized.

We also get to decide whether the belief is useful to our trading. We can safely disregard and discard the beliefs that are not helping our trades. For instance, I believe that when the %K and %D lines of the slow stochastics cross below the 20-level mark, it becomes a signal to go long on my favorite currency pairs.

Although I know that the two stochastics lines do not have any influence on the forex market, I still choose to believe them. Right now, it serves me to hold on to this belief. If a day comes when this belief no longer holds true, I will easily abandon it.

Here is the thing. If your current beliefs about the forex market do not serve your best interests, you need to let go.

What are the beliefs of top forex traders?

If you take one thing out of this article, let it be this: You can take beliefs on and off. You should take off the beliefs that are contributing NEGATIVELY to your career and put on the beliefs that will help you become the next successful forex trader in Kenya.

During my few years of trading the forex market, I have interacted, studied and analyzed the beliefs of many successful traders. Most of them tend to have a set of similar trade beliefs:

  1. They take full responsibility of their actions in the market
  2. They understand that position sizing is the key to scoring their FX trade goals
  • Although they might be wrong more times than they are right, they still make money on the forex market
  1. They take trading seriously. Their investment in the forex market is a business, not a hobby.
  2. They realize that losses are part of the business, and they are ready to face their losses, pick themselves up and look for the next trading signal
  3. They diligently record their results.
  • They are comfortable with taking carefully calculated risks
  • They understand the importance of risk-reward ratios
  1. They believe that they can make profits in the forex market
  2. They have full confidence in their forex trading strategies.

Do any of these beliefs compare to the ones that you already have? If none of them does, it is probably the high time that you started reevaluating your forex trading beliefs.

How to reorganize your beliefs about online forex trading

Have you ever observed that you can have conflicting beliefs at the same time? This is because you are a mixture of conflicting parts.

Inside you, there could be any of the following parts:

  • A trader part
  • A rebellious part
  • A caring parent part
  • A gambler part, and
  • A fun part, just to mention a few

Each of these parts form who you are. Each one of them can have a great impact on how you approach online forex trading. For instance, the fun part may dictate that you open a position in the market out of boredom, whilst the trader part warns you that you should wait until you see a clear entry signal.

Fortunately, the process of reorganizing your beliefs is a simple one.

Firstly, you need to realize that you want to acquire a certain belief. For instance, if you believe that position sizing is a significant part of your forex trading strategy (and if you were not calculating position size before), then you can learn about position sizing and apply it on the next trade you place.

If there is no negative charge impeding the adoption of the belief, and if you continue to consistently take action, you will easily acquire this new belief.

However, if there is a negative emotional charge that is impeding the adoption of this new belief, such as the gambler part tempting you to take exceedingly bigger positions in the market, then it will be difficult for you to acquire this belief.

Van K. Tharp in his book, Trading Beyond the Matrix, gives 2 suggestions that you should try:

i.             Feelings Release:

The feelings release process involves completely changing the way we react to negative feelings and thoughts.

Instead of continuing to resist them, you embrace them fully. This serves to dissipate the power that that feeling has over you. After some time, the feeling fizzles out.

ii.           Parts integration:

Parts integration involves letting the different parts of yourself negotiate and make mutual decisions. For instance, the fun part of you may enter into discussion with the trader part of you. The fun part decides to give way to the trader part in exchange for the trader part stepping aside for the fun part during the weekend.

This may sound weird, but trust me, the moment I tried it with one of my nasty beliefs, I experienced transformational effect in my career.

iii.          Create a Self-Improvement Routine for your trading beliefs

Becoming a successful forex trader requires constant and consistent refinements.

The best athletes work on their mental part of performance as much as they work on their physical training and physique.

The same applies to successful forex traders. They work on their psychology as much as they work on refining their trading techniques.

As beliefs are a central part of your forex trading psychology, you should considering having a beliefs self-improvement routine.

Your beliefs improvement routine can include:

  1. Listing your current beliefs about forex trading in paper and pen
  2. Listing your current beliefs about your forex trading strategy

A powerful beliefs system will help to shape your trades for the better.

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